The Uncertain State of Consumer Protection Law after Expressions Hair Design v. Schneiderman

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1 The Uncertain State of Consumer Protection Law after Expressions Hair Design v. Schneiderman Frances Butler Student Fellow Loyola University Chicago School of Law Institute for Consumer Antitrust Studies In Expressions Hair Design v. Schneiderman, the Supreme Court recently held that state surcharge bans regulate speech and are therefore subject to First Amendment scrutiny. 1 Many state laws ban merchants from adding surcharges to the bill of customers who pay with credit cards. 2 In Expressions, a group of merchants challenged New York s surcharge ban (General Business Law 518) on the ground that the law violated their First Amendment rights to free speech. 3 The Supreme Court ultimately remanded Expressions to the Second Circuit for final resolution of the plaintiffs First Amendment claims. Still, the Court s decision leaves open the possibility that a higher level of constitutional scrutiny will apply to surcharge bans. Expressions also raises questions about the legality of similar consumer protection laws. Credit Card Surcharges When a customer pays with a credit card, merchants are charged a percentage of the purchase price by the credit card issuer. Merchants often want to pass on these costs to customers in the form of a surcharge. Surcharges were first prohibited by federal law under the Truth in Lending Act (TILA). 4 The original version of the prohibition required merchants to 1 Expressions Hair Design v. Schneiderman, 137 S.Ct. 1144, 1151 (2017) (hereinafter Expressions ). 2 See also, CAL. CIV. CODE (A) (West Supp. 2015) (found unconstitutional in Italian Colors Restaurant v. Harris, 99 F.Supp.3d 1199 (E.D.Cal. 2015); COLO REV. STAT. ANN (1) (2014); CONN. GEN. STAT FF(A) (2013); FLA. STAT (1) (2016); KAN. STAT. ANN 16A (2007); MASS. GEN. LAWS ANN. ch. 140D 28A(a)(2) (West 2012); N.Y. GEN. BUS. LAW 518 (McKinney 1984); 14A OKLA. STAT (2011) (as amended by 2017 Okla. Sess. Law Serv. Ch. 31 (H.B. 2178) (West 2017)); TEX. FIN. CODE ANN (a) (West Supp. 2014). 3 Expressions, 137 S.Ct. at Pub. L. No , tit. 1, 82 Stat. 146 (1968) (codified as amended at 15 U.S.C (f) (2012)). 1

2 disclose finance charges, or surcharges, to consumers. 5 TILA was later amended to allow cash discounts while keeping its ban on surcharges. 6 Surcharge bans may protect consumers by saving them the inconvenience and surprise of having extra charges added to their bill. The bans may also bolster retail sales and prevent merchants from using surcharges to reap windfall profits. 7 TILA s ban on surcharges was extended twice, but in 1984 Congress allowed the surcharge ban to expire. 8 Following the lapse of the federal ban, nine states along with Puerto Rico passed their own surcharge bans. 9 Historically, credit card companies also included surcharge provisions in their contracts with merchants. After antitrust litigation raised questions about the legality of these contractual bans on surcharges, 10 merchants began to challenge bans mandated by state laws. Courts have disagreed whether state surcharge bans regulate speech or conduct. Two courts invalidated the bans under intermediate scrutiny applicable to speech regulations, while a third court upheld the bans under rational basis scrutiny that applies to laws regulating economic conduct. 11 The Expressions case followed on the heels of this litigation. Expressions Hair Design v. Schneiderman In Expressions, five New York retailers sued to challenge New York General Business Law 518. Section 518 states that no seller in a sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check, or similar means. 12 The United States District Court for the Southern District of New York ruled for the plaintiffs 5 S. Rep. No , at 1 (1981) (quoting Pub. L. No , 106(a)(1), 82 Stat. 148). 6 Fair Credit Billing Act of 1974, Pub. L. No , 306, 88 Stat. 1500, 1515 (1974). 7 Expressions, 808 F.2d at 122, at See supra note Expressions Hair Design v. Schneiderman, 137 U.S. 1144, 1147 (2017). 11 See Italian Colors Restaurant v. Harris, 99 F.Supp.3d 1199 (E.D. Cal. 2015); Dana s R.R. Supply v. Atty. Gen. Fla., 807 F.3d 1235 (11th Cir. 2015); Rowell v. Pettijohn, 813 F.2d 73 (5th Cir. 2016). 12 N.Y. GEN. BUS. LAW 518 (McKinney 1984). 2

3 and found that 518 violates the First Amendment. The court reasoned that 518 regulates speech because it distinguishes between prohibited behavior and non-prohibited behavior based on words alone. 13 As a speech regulation, 518 was subject to either intermediate scrutiny for regulation of commercial speech, under Central Hudson, or rational basis scrutiny for regulations mandating disclosure under Zauderer. 14 The district court applied intermediate scrutiny and found 518 to be a plainly overbroad regulation that failed this standard. 15 New York s Attorney General appealed to the Court of Appeals for the Second Circuit. The Second Circuit limited its ruling to single sticker pricing schemes in which merchants post a credit card surcharge on top of a single list price. 16 The court found that 518 s single sticker pricing requirements merely regulated the price that merchants must charge for a product. Therefore, the statute regulated what merchants must do, not what they must communicate. 17 As a result, the court held that 518 was constitutional as applied to single sticker pricing schemes and vacated the district court s decision. 18 The merchants appealed the Second Circuit s decision, and the Supreme Court granted certiorari. Chief Justice Roberts drafted a majority opinion which addressed only the legality of 518 as applied to single-sticker pricing schemes. 19 Roberts distinguished 518 from a simple price regulation that would, for example, require all New York delis to charge $10 for their sandwiches. 20 In order to comply with such a regulation, New York delis would advertise the 13 Expressions Hair Design v. Schneiderman, 975 F.Supp.2d 430, 436 (S.D.N.Y. 2013). 14 at 445 (citing Central Hudson Gas & Electric Corp. v. Public Service Comm n of New York, 477 U.S. 557 (1980); Zauderer v. Office of Disciplinary Counsel of the Supreme Court of Ohio, 471 U.S. 626, 651 (1985)). 15 at Expressions Hair Design v. Schneiderman, 808 F.3d 118, (2d Cir. 2015). The court invoked Pullman abstention and declined to address plaintiffs challenges to dual pricing schemes, id. 17 at Expressions Hair Design v. Schneiderman, 137 S.Ct. 1144, 1149 (2017). 20 3

4 $10 price on their menus or have their employees tell customers that price. 21 According to Roberts, while such a law would have an incidental effect on the speech of merchants, it would primarily restrict merchants conduct. 22 Section 518, on the other hand, allows merchants to charge any price they want for their items. A merchant could charge $10 for cash and $9.70, $10, or $10.30 or any other amount for credit. 23 According to Roberts, 518 regulates how sellers may communicate their prices. 24 A merchant who wants to charge $10 for cash and $10.30 for credit must communicate this price by displaying a single sticker price of $ He may not say the price is $10 with a 3% surcharge or $10 plus $.30 for credit. 26 As a result, Roberts concluded that 518 regulates speech. 27 Roberts majority opinion did not decide whether 518 was subject to intermediate scrutiny under Central Hudson or rational basis review under Zauderer. 28 The Court remanded the case to the Second Circuit for resolution of this issue. Justice Sotomayor wrote a concurrence joined by Justice Alito. 29 Sotomayor critiqued the majority s decision to resolve only a quarter loaf of the case. 30 She noted that 518 s requirements were uncertain and urged the Second Circuit to certify this issue to the New York Court of Appeals for a definitive interpretation of the statute. 31 According to Sotomayor, certification may eliminate the need for a constitutional ruling altogether, as the state could read at at at 1153 (Sotomayor, J., concurring)

5 518 as being a mere price regulation which does not restrict speech. 32 Certification may also limit the scope of plaintiffs concerns or allow the court to resolve plaintiffs challenges in one go. 33 Justice Breyer wrote a separate concurrence in which he agreed with Sotomayor s call for certification. Breyer also criticized the Court s willingness to make First Amendment protections depend on a distinction between the regulation of speech and conduct. On remand, the Second Circuit certified the case to the New York Court of Appeals for a definitive interpretation of The Second Circuit asked whether a merchant complies with Section 518 so long as the merchant posts the total dollars-and-cents price charged to credit card users. 35 The answer to this question will help the Second Circuit determine whether 518 is subject to intermediate or rational basis scrutiny. The New York Court of Appeals recently accepted certification, 36 and the Second Circuit will now have a definitive interpretation of 518 before it resolves this case. Expressions Impact on Consumer Protection Laws The decision in Expressions leaves open many questions for other consumer protection laws. Before the Supreme Court decided this case, commentators questioned whether First Amendment scrutiny would apply to a host of additional consumer protection laws. 37 Expressions leaves several of these questions unanswered. Many state consumer protection laws force sellers to frame or communicate their prices in certain ways, in order to make sure that these prices are transparent and truthful. 38 Examples of these price framing regulations include: 32 at Expressions Hair Design v. Schneiderman, 877 F.3d 99, 102 (2017) Expressions Hair Design v. Schneiderman, 30 N.Y.3d 1051 (2018). 37 Matthew Moloshok, Free Speech Versus Fair Markets: Will Credit-Card Surcharge Cases Supercharge the First Amendment?, 16 FEB-ANTITRUST SOURCE 1, 8 (2017). 38 at 8. 5

6 requirements by certain states that regulate the display of unit prices, 39 Regulation Z s requirement that certain transactions contain disclosure of annual percentage rates, 40 and state regulations relating to when merchants can advertise items as being on sale. 41 Now that Expressions has subjected a price-framing regulation to First Amendment scrutiny, regulations imposing similar requirements may also be challenged under the First Amendment. 42 Conclusion In an earlier case, Justice Breyer predicted that First Amendment challenges under the commercial speech doctrine would open a Pandora s Box and raise constitutional questions about a number of regulatory practices. 43 The Supreme Court s decision in Expressions does just that, by subjecting surcharge bans, a form of economic legislation, to First Amendment scrutiny. 44 The decision raises new questions about the constitutionality of many important pieces of consumer protection legislation. 45 Courts will likely see more First Amendment challenges to economic legislation in the future. As a result, the true impact of the Expressions decision remains to be seen Moloshok, supra note 37, at 8; see 12 C.F.R (2015) (requiring that APR be disclosed in certain types of disclosures). 41 Moloshok, supra note 37, at See id.; Expressions Hair Design v. Schneiderman, 337 S.Ct. 1144, 1151 (2017). 43 Sorrell v. IMS Health, 564 U.S. 552, 602 (2011) (Breyer, J., dissenting). 44 Expressions, 137 S.Ct. at See Moloshok, supra note 37, at